BlackRock vs. Vanguard: The world's biggest asset managers don't see eye to eye on the classic 60/40 investment strategy.
Reuters, SOPA
- A 60/40 investing strategy allocates 60% of a portfolio to stocks and the remaining 40% to bonds.
- The classic approach delivered steady returns for investors for nearly a decade – then cratered in 2022 as equities plunged.
- BlackRock and Vanguard, the world's biggest money managers, now disagree on how the portfolio will fare over the coming years.
The world's two largest money managers no longer see eye to eye on the classic 60/40 portfolio.
BlackRock and Vanguard – both of which manage over $8 trillion worth of assets – are split on the strategy, in which investors allocate 60% of their portfolio to stocks and the other 40% to bonds.
The 60/40 tended to return around 8% between the 2008 financial crisis and the start of last year, with stock prices soaring and bonds reliably delivering steady returns over that period.
But both the asset classes had a hellish 2022 in which they shed over $30 trillion in value, meaning the typical 60/40 portfolio plummeted between 16% and 17%, according to multiple asset managers.
The two marquee investing names are at odds with each other on whether last year's trend was an outlier or a sign that the 60/40 split is no longer the best way to build a portfolio.
Vanguard sees the 60/40 performing again
Vanguard is playing up the portfolio mix's "outstanding decade" – and believes the strategy will carry on delivering strong returns for the next 10 years.
"Equities and fixed income both had a tough year in 2022, there's no doubt about it – but we feel like there was too much focus placed on last year and not enough on the strong run the 60/40 had up until that point," Vanguard investment strategist Todd Schlanger told Insider in a recent interview.
Stocks did most of the heavy lifting for the portfolio during that run, with the S&P 500 finishing all but three of the last 10 years in the green and racking up double-digit gains three years in a row between 2019 and 2021.
Even if the outlook for equities looks cloudy right now, high interest rates will help 40% of the portfolio delivering steady returns, according to Schlanger. Bonds tend to pay out higher yields when borrowing costs rise.
"Equities did a large part of the work over the past 10 years because of the bull market we've been in," Schlanger said. "Now there can be a more balanced outlook for equities and bonds, due to higher interest rates and higher yields within fixed income."
BlackRock calls for 'new portfolio approach'
Unlike Vanguard, BlackRock is calling time on the 60/40, saying that a "new regime" requires a "new portfolio approach".
The world's largest asset manager still expects the balanced portfolio to deliver returns of around 7.5% over the next decade – but believes that won't appeal to all investors in an era when inflation is much higher.
"That's a reasonable return," BlackRock Investment Institute's head or portfolio research Vivek Paul told Insider. "But our point is, on a risk-adjusted basis it's not as attractive as it was the last 10 years."
Paul added that while the 60/40 portfolio delivered steady returns in the calmer years between the financial crisis and the start of 2022, investors will need to be more flexible in a period where the Federal Reserve is more focused on crushing price pressures than propping up valuations.
"We're coming out of this environment that economists have called the 'Great Moderation', characterized by stable growth and inflation," he said. "The difference is that we think these two things will not be comparatively stable and there's going to be more of a trade-off."
"Simple and static was hard to beat in the past. Now, because the regime is different and more volatile, you need to be more nimble and more granular," Paul added.
Top asset managers haven't tended to disagree on the 60/40, which was previously seen as one of the easiest routes into markets for entry-level investors.
But the clash over the portfolio shows that some of the world's biggest investors are still making their minds up over whether the massive volatility of 2022 is starting to subside – or a sign of things to come.